There has been a lot of action on the interest rate front to round out the year. Many of you who are waiting on floating rates for decreases in fixed rates have a difficult decision to make: how long to wait on a floating rate before fixing?

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First, let’s look at what the market is doing.

Recent Changes in Interest Rates

• The Reserve Bank did what was widely expected and on 27th November, the OCR was dropped by 0.5%, now sitting at 4.25%.
• The Governor of the Reserve Bank stated that if the current economic situation continues to track as it is, they expect to drop the OCR by another 0.5% in their next announcement on 18th February 2025.
• Banks dropped their floating rates (not always by 0.5%), which was applied to new lending straight away, but will take a few weeks to be applied to existing floating loans.
• Fixed rates didn’t move by 0.5% as some expected.

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Current Rates

• The 6-month rate has dropped a little, so at the time of writing (10th December), we are seeing 5.99% rates being offered. The 1-year rate had remained stubbornly at around 5.79%, however, in the last couple of days, we are starting to see 5.65% from some banks.
• The interest rate “curve,” i.e., a graph of the rates from 6 months to 5 years, is looking very “flat.” For the last few years, the curve has been “inverted,” i.e., long-term rates have been cheaper than short-term rates. Currently, short-term rates are nudging down, and news flash, longer-term rates have nudged up a little, so the “curve” is pretty much not a curve but a flat line. (I guess that is technically still a curve?) You can (almost) get the same rates anywhere from 6 months to 5 years (there is only a 0.5% difference between them all).

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Deciding on Your Mortgage Strategy

So, what to do?

For the last few months, there has been a 0.5% difference between the 6-month and 1-year rates. Based on this, I think the 1-year rate was attractive. If (as is the case with many banks) there is only a 0.2% difference between the 6-month and 1-year rates, I think the 6-month rate is looking pretty attractive. If the difference between the 6-month and 1-year rates spreads out again, I think the balance of that decision changes again.

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Considering Long-Term Rates

However, the “flattening interest rate curve” does throw in a question that we haven’t been considering for some time. If the longer-term rates are starting to nudge up, is now the time to lock in for longer? I can understand the rationale, and certainly, at some time in the next 12-18 months, I think there will be much more talk around this. I do wonder if, based on current interest rate predictions, we are not quite there yet. Do remember that those longer home loan rates (i.e., 3-5 years) are impacted more by international events, whereas the shorter rates are more impacted by the OCR movements.

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What Are Your Options?

I think there is increasing uncertainty right now about what the best decision is (and of course, this needs to be personalized for each customer’s specific situation - so you will appreciate this is all broad, educational-type information).

There are three broad ways you could proceed when you think strategically about fixing your home loan right now. There are arguments for all of these, which I realize is not particularly helpful!

1. Keep fixing for short periods, i.e., either the 6-month or 1-year rates, and keep doing this for a few years.
2. Lock in a longer-term rate sooner rather than later (and resist the temptation to look at the shorter rates continuing to drop). In terms of long-term averages, 5.6% is a pretty good rate, which is where the 3–5-year rates are currently sitting.
3. Split your loans between short-term and longer-term. That is, hedge your bets.

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Talk to Your Adviser

On that note, that is it for me and 2025. If you are in the position of needing to fix your home loan, do get in touch with your adviser (but probably not on Christmas Eve), and they can talk you through the options.

I hope you have a great festive season, and we’ll resume transmission in the New Year.

Brendon.

Brendon Ojala (FSP119244) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see our disclosure statement on our website.

About Brendon:

Hi, I'm Brendon, one of the owners and advisers at Velocity Financial. I have been giving advice on mortgages and insurances at Velocity for around 15 years, and it is great to be able to work with people to achieve their financial goals. Prior to giving money advice, I worked as a youth worker and managed teams for a not-for-profit organisation. I live with my wife and one of my sons (the other one only stays when he needs food) in Berhampore, and if I'm not talking revolving credit accounts, I can be found running the trails of Wellington.

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